Afghanistan’s economic recovery is slow as continued insecurity stalls private investment and consumer demand. The agriculture sector recorded low growth in 2017 due to unfavourable weather conditions, with the service and industry sectors recording only slightly stronger growth. In the long term, sustained economic growth requires a structural economic transformation and new sustainable sources of growth.

Sources: World Bank, Fitch Solutions

2. Major Economic/Political Events and Upcoming Elections

July 2016Former US President Barack Obama stated that 8,400 US troops would remain in Afghanistan into 2017.

September 2016The Afghan government signed a peace agreement with the militant group Hezb-e Islami.

August 2017US President Donald Trump stated that he would send more troops to fight a resurgent Taliban.

Afghanistan joined the WTO in July 2016 as its 164th member, after nearly 12 years of negotiating its accession terms. It has also formally accepted the WTO’s new Trade Facilitation Agreement (TFA). Afghanistan is the ninth least developed country to accede to the WTO since the organisation’s establishment in 1995.

The Customs Law of 2005 authorises the government to prohibit or restrict the imports of certain goods. Under this law, Afghanistan currently prohibits the import of alcoholic drinks, live pork and pork products, cotton seeds, narcotics and illegal drugs.

In July 2010 Afghanistan introduced export duties on scrap metal and waste, with applied rates varying between 5% and 40%.

In February 2010 Afghanistan introduced a royalty tax on the exports of minerals (The Law of Minerals), which regulates the extraction of minerals in the country for exportation. It sets a royalty tax of 15% on the commercial invoice value of all minerals, except for lapis. With respect to lapis, it sets a royalty tax of 15%, depending on the grade of the estimated stone value.

In February 2010 the government of Afghanistan introduced export duties on certain natural resources. The duties vary from 2.5-40%, depending on the product.

Afghanistan has an average tariff rate of 7%, the third-lowest in the South Asia region (out of eight countries), which reflects, according to officials, the government’s intention to establish an open, market-based economy.

Trade with Afghanistan is complicated and cumbersome. The World Bank 2018 Ease of Doing Business Report ranks Afghanistan 175th out of 190 countries in the ‘trading across borders’ index. Basic communications and support for automated processes are held back by unreliable electricity supply at major crossing points and the long and porous border. Traders face unclear procedures at the borders and extra-legal duties and bureaucratic hurdles. Coordination is very low between customs and other government authorities. Customs reform efforts are underway to establish standardised fees and procedures for imported goods, as well as streamlined procedures for exports, along with a trained cadre of professional staff.

Sources: WTO - Trade Policy Review, Fitch Solutions

6. Trade Agreement

6.1 Trade Updates

After the first air corridor between Afghanistan and Turkey was launched in May 2018, officials from the two states spoke about Afghanistan-Turkey trade ties and the importance of the new air corridor for mutual trade. Afghan Minister of Commerce and Industries, Humayun Rasa, stated that, in the near future, a new trade agreement will be signed between the two countries, which would increase Afghanistan’s exports to Turkey.

6.2 Multinational Trade Agreements

Active

Afghanistan-India Bilateral Partial Scope Agreement: The Agreement covers trade in goods and entered into force in May 2003. India is Afghanistan's second largest export market, and, as of 2016, India received 38.6% of Afghanistan's total exports, of which edible fruit and nuts, peel of citrus fruit and melons made up the highest percentage.

The South Asian Free Trade Agreement (SAFTA): SAFTA is a plurilateral Free Trade Agreement between Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. The agreement covers trade in goods and originally entered into force in January 2006; Afghanistan later joined in August 2011. Under SAFTA, Afghanistan currently has duty-free access to India for all traded goods, except cigarettes and alcohol, and pays duties of 5% to Pakistan on non-sensitive goods.

The Afghanistan-Pakistan Trade and Transit Agreement (APTTA): APTTA came into force in June 2011, with the purpose of the agreement being to facilitate the movement of goods between the two countries. The main provisions of the agreement include freedom of transit through each state's territory via pre-defined routes, facilitation of clearance procedures, the establishment of technical requirements for the admittance of road vehicles and drivers, and the elimination of customs duties and taxes on all goods in transit, and means of transit and transport, regardless of destination or purpose.

The Afghanistan-US Trade and Investment Framework Agreement (TIFA): TIFA was signed between Afghanistan and the United States and came into effect in 2004. It has aimed to establish a framework for the discussion of economic relations between the two countries. Since then, there have been annual meetings of the US–Afghanistan Council on Trade and Investment, established under the auspices of the TIFA, to further the bilateral cooperation needed to achieve Afghanistan’s goals of creating an environment conducive to economic reform, private sector development and trade expansion.

Economic Cooperation Organisation Trade Agreement (ECOTA): ECOTA is a trade agreement between Afghanistan, Azerbaijan, Iran, Kazakhstan, Kyrgyzstan, Pakistan, Tajikistan, Turkey, Turkmenistan and Uzbekistan that was signed in 2003 and entered into force in 2008.

Source: WTO Regional Trade Agreements database

7. Investment Policy

7.1 Foreign Direct Investment

Source: UNCTADDate last reviewed: August 21, 2018

7.2 Foreign Direct Investment Policy

The Afghanistan Investment Support Agency (AISA) is the country's investment promotion agency that was merged into the Ministry of Commerce and Industries (MoCI) in October 2016. The transition period is ongoing, which means that AISA continues to play a semi-independent role, while MoCI has taken on the role of promoting business growth, investment and trade.

Under Afghanistan's Private Investment Law (PIL) of 2005, qualified domestic or foreign entities may invest in all sectors of the economy except in nuclear energy and gambling establishments. The Afghan government, at all levels, has stressed its commitment to bolstering private sector-led development, and increasing domestic and foreign investment. Foreign and domestic private entities have equal standing and may establish and own business enterprises, engage in all forms of remunerative activity, and freely acquire and dispose of interests in business enterprises. Although the High Commission on Investment (HCI) has authority to limit the share of foreign investment in industries, such as production and sales of weapons and explosives, non-banking financial activities, insurance, natural resources and infrastructure (power, water, sewage, waste-treatment, airports, telecommunications, and health and education facilities), that authority has never been exercised. In practice, investments may be 100% foreign-owned. Direct investment exceeding USD3 million, however, requires HCI approval.

The Afghan Constitution and the PIL do not allow foreign ownership of land; however, foreigners may lease land for up to 50 years.

There is no requirement for foreigners to secure Afghan partners, but, in practice, most foreign firms find it necessary to collaborate with an Afghan partner.

In March 2011 Afghanistan's Ministry of Mines and Petroleum initiated the liberalisation of the country's hydrocarbon sector by issuing a tender offer for oil exploration and production in the Amu Darya Basin in the northern part of the country. This first public tender was based on the country's new hydrocarbon law, which states that 'all hydrocarbon operation contracts shall be awarded through public tenders'.

The withdrawal of US and NATO forces in 2014 left USD2 billion worth of well-developed infrastructure and sophisticated machinery at eight strategic airfields in Afghanistan, with Bastion-Helmand and Bagram-Kabul two of the most important.

The Afghan government, through the Afghan Airfield Economic Development Commission (AAEDC), is considering Special Economic Zones (SEZs) at each airfield that will, eventually, be transferred to Afghan civilian control. If the plan is approved, the Afghan government will need to enact laws and regulations for such zones to be established.

Sources: US Department of Commerce, Fitch Solutions

8. Taxation – 2018

Value Added Tax: N/A

Corporate Income Tax: 20%

Source: PFK Worldwide Tax Guide 2018-19

8.1 Important Updates to Taxation Information

All businesses, irrespective of the legal status of the company, are subject to 20% corporate income tax on income, under Article 4 of the Income Tax law in Afghanistan.

8.2 Business Taxes

Type of Tax

Tax Rate and Base

Corporate Tax

All businesses, regardless of legal status, are subject to 20% corporate income tax.

VAT is levied on only very few items and services (such as hotel services). Currently, there is no separate comprehensive regulation for VAT. The government planned to levy VAT on various services and goods in 2017, but this has been deferred.

The Foreigners Employment law in Afghanistan stipulates that foreigners can be employed on the basis of a work permit issued by the Ministry of Labour and Social Affairs. Work permits are issued for one year and are renewable. Foreign citizens traveling to Afghanistan for employment need to obtain business visas and work permits.

9.2 Localisation Requirements

The employment of foreign workers is allowed, but a 2005 labour regulation requires that priority be given to equally qualified Afghan workers.

9.3 Visa/Travel Restrictions

Citizens of all countries require a visa to visit Afghanistan. Exemptions apply to visitors born in Afghanistan or born to Afghan parents, as well as for holders of diplomatic or service passports of China, India (diplomatic only), Indonesia, Iran, Tajikistan and Turkey for visits of up to 30 days.

9.4 Security Considerations

It is advised that no foreigners travel to Afghanistan unless travel is essential (although essential travel is restricted to only a few areas, including Kabul). Due to the ongoing war in Afghanistan, any foreign workers sent to the country will need high levels of additional security/protection, as well as additional compensation. Foreign workers would need to be paid a danger pay of approximately 35% of their basic compensation, as well as a hardship pay of 35% of their basic compensation on top of their normal wages/salaries.

Sources: Government websites, Fitch Solutions

10. Risks

10.1 Sovereign Credit Ratings

Rating (Outlook)

Rating Date

Moody's

Not Rated

Not Rated

Standard & Poor's

Not Rated

Not Rated

Fitch Ratings

Not Rated

Not Rated

Sources: Moody's, Standard & Poor's, Fitch Ratings

10.2 Competitiveness and Efficiency Indicators

World Ranking

2016

2017

2018

Ease of Doing Business Index

182/189

183/190

183/190

Ease of Paying Taxes Index

89/189

163/190

176/190

Logistics Performance Index

150/160

N/A

160/160

Corruption Perception Index

169/176

177/180

N/A

IMD World Competitiveness

N/A

N/A

N/A

Sources: World Bank, IMD, Transparency International

10.3 Fitch Solutions Risk Indices

World Ranking

2016

2017

2018

Economic Risk Index Rank

185/202

Short-Term Economic Risk Score

36.7

37.5

38.5

Long-Term Economic Risk Score

38.5

36.4

37.0

Political Risk Index Rank

199/202

Short-Term Political Risk Score

40

35.8

35.8

Long-Term Political Risk Score

20.2

21.2

21.2

Operational Risk Index Rank

196/201

Operational Risk Score

24.2

23.5

22.7

Source: Fitch SolutionsDate last reviewed: August 21, 2018

10.4 Fitch Solutions Risk Summary

ECONOMIC RISKAfghanistan’s long-term economic risk is among the highest in the world, but slightly lower than other extremely troubled states, such as South Sudan, Sudan and Syria. The high risk reflects a high degree of volatility in economic growth and other key economic indicators, high inflation and unemployment, very wide fiscal and current account deficits (when foreign assistance is stripped out), as well as weak financial systems.

OPERATIONAL RISKAfghanistan continues to face considerable challenges in rebuilding its war-torn economy, and the contracts it has signed with China will go some way in providing support for the development of the country's infrastructure. However, the deteriorating security outlook poses risks.

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